The Impact of Uncertainty Shocks: A Firm-Level Estimation and a 9/11 Simulation

Uncertainty appears to vary strongly over time, temporarily rising by up to 200% around major shocks like the Cuban Missile crisis, the assassination of JFK and 9/11. This paper o¤ers the …rst structural framework to analyze uncertainty shocks. I build a model with a time varying second moment, which is numerically solved and estimated using …rm level data. The parameterized model is then used to simulate a macro uncertainty shock, which produces a rapid drop and rebound in employment, investment and productivity growth, and a moderate loss in GDP. This temporary impact of a second moment shock is di¤erent from the typically persistent impact of a …rst moment shock, highlighting the importance for policymakers of identifying their relative magnitudes in major shocks. The simulation of an uncertainty shock is then compared to VAR estimations on monthly data and a 9/11 event-study, displaying a surprisingly good match. Keywords: Labor, investment, uncertainty, real options JEL Classi…cation: D92, E22, D8, C23. Acknowledgement: This was the main chapter of my PhD thesis. I am for grateful to participants at seminars at the Bank of England, Bank of Portugal, Berkeley, the Board of Governors, Boston College, Boston Fed, Chicago Fed, Chicago GSB, Kellogg, LSE, MIT, NBER EF&G and CM&E groups, Northwestern, San Francisco Fed, Stanford, UCL and Yale. Correspondence: [email protected] Dept. of Economics, Stanford University, 579 Serra Mall, Stanford, CA 94305; the Centre for Economic Performance, the NBER and SIEPR.